(EBAY) eBay Fourth Quarter 2011 Earnings Preview

eBay Inc. (EBAY) is scheduled to announce its fourth quarter fiscal 2011 results on January 18, 2012, and we notice no movement in analyst estimates.

Prior-Quarter Synopsis

eBay’s third quarter 2011 earnings per share (EPS) of 40 cents (excluding one-time items and including stock-based compensation) were level with the Zacks Consensus Estimate.

The company reported gross revenue of $2.97 billion, up 7.4% sequentially and better than the Consensus expectation of $2.91 billion. Over 86% of eBay’s total revenue was transactions-based, while the remaining 14% came from marketing services. Despite encouraging revenue growth, demand trends appeared sluggish in the third quarter.

The pro forma gross margin was 69.0%, down 276 basis points (bps) sequentially and 186 bps year over year due to higher transaction expenses, partially on account of a rising transaction loss rate.

Fourth Quarter Guidance

eBay expects revenue of $3.20–3.35 billion (up 8–13% sequentially and 28–34% year over year), GAAP EPS of $1.47–$1.53 and non GAAP EPS of 55–58 cents.For the fourth quarter, the Zacks Consensus Estimate was pegged at 51 cents when the company last reported.

For 2011, management expects revenue of $11.5–$11.6 billion, GAAP EPS of $2.42 to $2.48 and non GAAP EPS of $1.98 to $2.01. The Zacks Consensus Estimate is pegged at $1.71, up a cent since the company last reported.

Agreement of Analysts

Out of the 16 analysts providing estimates for the fourth quarter, none revised the estimate in the last 30 days. Even for fiscal 2011, there was no revision in the last 30 days.

The analysts expect a decent fourth quarter with revenue and earnings per share slightly above the guidance range. They see continued traction in eBay’s Marketplace business and continued online and offline share gains in the PayPal segment.

A few analysts believe that the departure of Scott Thompson will not affect the performance of PayPal in the near term. They contend that the secular growth trend in online users as well as payment volume growth (as a result of e-commerce growth and new merchant sign-ups) will continue to drive the growth momentum in PayPal. These analysts believe that International total payments volume (TPV) and revenue, in particular have been the strengths for PayPal, (with FX-neutral growth in the 30–40% range over the past few quarters). They believe that this momentum is likely to remain so going forward.

On the contrary, another group of analysts see Scott’s departure as a material loss for eBay, given his strong record of execution during his tenure of 4 years in PayPal. However, John Donahoe who is serving as interim president is optimistic about PayPal’s outlook through 2013 and also indicated a strong fourth quarter.

Magnitude of Estimate Revisions

In the past 30 days, there was no change to the Zacks Consensus Estimate for the fourth quarter and fiscal 2011.

In the past 90 days, the Zacks Consensus Estimate increased 4 cents to 55 cents for the fourth quarter and 2 cents to $1.72 for fiscal 2011. Therefore, positive sentiments appear to have outweighed the negative post third-quarter earnings.

The analysts expect EBAY to deliver solid top-line growth driven by strength in PayPal, and expectations of continued improvement in Marketplaces. They believe PayPal will continue its strong performance and expand merchant coverage and share of checkout, generating strong operating margin leverage.


We expect eBay to report another good quarter due to continued robust growth in PayPal and strong business fundamentals.

We believe eBay’s PayPal is well positioned for sustained growth. Very recently, Paypal announced its initial Point of Sale (POS) test with Home Depot. We believe this announcement is positive, given the size, strength and brand value of Home Depot (5th largest retailer in the U.S. with approximately 2,500 stores and $68 billion in revenue). This would considerably increase PayPal’s addressable market.

PayPal has reinforced its mobile payments segment with strategic acquisitions such as Zong. Because of PayPal’s mixed funding sources between bank transfers, debit cards and credit cards, it can offer cheaper payment transactions than credit cards. We believe this competitive advantage should drive penetration across the Internet and the broadening mobile landscape.

However, we are concerned about increasing competition from major online retailers, such as Amazon.com (AMZN), as well as many other smaller players. Additionally, Google Inc. (GOOG) has been eyeing the online retail space, threatening eBay’s dominance. Google Wallet has the potential to become a predominant choice for users’ mobile payments given the relationship it has already forged with credit card giants such as Mastercard Inc. (MA) and other banks.

Currently, eBay has a Zacks #3 Rank, implying a short-term Hold recommendation.

AMAZON.COM INC (AMZN): Free Stock Analysis Report

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MASTERCARD INC (MA): Free Stock Analysis Report

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